Economic Bulletin No. 4 - 2016

Global growth remains moderate

Although the result of the UK referendum held in June has had no significant repercussions to date on conditions in the international financial markets, the world economy nonetheless continues to expand at a moderate pace. The outlook has improved slightly in the emerging countries, though it is still uncertain in the main advanced economies; growth expectations for international trade have been revised downwards again. There are risks stemming from the geopolitical tensions stoked by the conflicts in the Middle East, the threat of terrorism, and fears that political developments in many of the advanced economies could lead to forms of isolationism.

In the euro area growth stabilizes and inflation remains low

So far the upturn in the euro area has not been significantly affected by the global uncertainty. In the spring months, however, economic activity slowed and in the near term could be affected by the weakening of global demand. Consumer price inflation is expected to rise in the coming months, following the waning effects of the decline in energy prices recorded at the end of last year; however, partly reflecting the still ample margins of spare production capacity, core inflation is showing no sign of a lasting increase and remains a source of concern.

Monetary policy will remain expansionary

The Governing Council of the ECB will preserve the very substantial amount of monetary support that is embedded in its recent staff projections. If warranted, it will act by using all the instruments available within its mandate. Meanwhile, the Governing Council tasked the relevant committees to evaluate the options that ensure a smooth implementation of the asset purchase programme.

In Italy the recovery continues, albeit at a modest pace

After stagnating in the second quarter, reflecting a drop in national demand, in the third quarter output in Italy appeared to return to moderate growth. During the summer the short-term economic indicators (in particular, industrial production and business surveys) were at levels consistent with a small expansion in economic activity. Despite declining over the last few months, household confidence nonetheless remains high; the number of new car registrations was essentially unchanged.

Investment is struggling to pick up

Since the first quarter of 2015 investment has picked up again, but the pace of the recovery has been subdued compared with other euro-area countries and what was the norm following previous recessions. According to the statistical evidence, and our business surveys, investment is no longer being held back by the conditions of access to credit – which are accommodative again – but most of all by the continued weak outlook for demand. Our analyses indicate that a return to the rate of investment observed before the global financial crisis, in addition to strengthening the cyclical upturn, would raise Italy’s growth potential by over half a percentage point.

Exports grow, but could be affected in the near term by the global economic situation

In the second quarter, exports in Italy increased across all sectors but especially in traditional manufacturing, metals and metal products, mechanical machinery and equipment, and food products. Signs of weaker growth, linked to the global economic outlook and common to all euro-area countries have, however, emerged since the summer.

Growth in employment outpaces that in GDP

Employment rose at a faster pace than GDP, in part reflecting Government measures on social security contribution relief and the labour market reform. In the second quarter employment was up by 1.8 per cent on the year-earlier period; the unemployment rate fell to 11.5 per cent (from a peak of 12.8 per cent at the end of 2014) and youth unemployment diminished further. The share of open-ended contracts continued to rise, though at a slower pace than last year, owing to the reduction in social security contribution relief.

Consumer price inflation remains very low

According to provisional data, consumer price inflation, which has been negative since February, rose again to barely positive levels in September; a modest recovery is expected between the end of this year and the beginning of the next, above all in the prices of energy goods. Core inflation, however, is still very low, mainly due to the ample margins of spare production capacity; growth in contractual wages has declined, affected by the non-renewal of expired contracts.

Lending conditions have stabilized …

Bank lending conditions are relaxed: the cost of loans to firms is at historically very low levels; the surveys indicate that credit conditions are improving, though they continue to differ by firm size. Lending to households is increasing while that to firms is mainly being affected by continued weak demand. The pace of lending was strongest for companies in the services sector and for large firms.

… and credit quality improves

The improvement in the economic outlook is gradually raising the quality of Italian banks’ loan portfolios, which continue to contain a very large share of non-performing loans inherited from the long recession. The ratio of new non-performing loans to outstanding loans has fallen to the levels recorded at the beginning of the global financial crisis; the stock of non-performing exposures began to diminish at the end of 2015. In the July stress test, four of the five Italian banks that took part demonstrated they could withstand the impact of an extremely adverse macrofinancial scenario; one bank immediately launched a bad loan sale and a recapitalization plan. Over the course of the year, bank share prices fell, probably owing to lower market expectations on profitability, but there was also a marked reduction in credit default swap premiums, following the peak recorded in February.

The Government revises down its estimates for growth

In the Update of the 2016 Economic and Financial Document presented on 27 September, the Government revised down its estimate for GDP growth in Italy this year and the next, in line with the recent economic data and the deterioration of the international environment. In the current legislation scenario GDP is expected to increase by 0.8 per cent this year and to slow to 0.6 per cent in 2017, an estimate that is on the lower end of the distribution of those recently released by the main private and institutional forecasters. The policy scenario predicts that GDP growth will be 0.4 points higher in 2017, reaching 1.0 per cent. The effects of the Government’s intended measures will depend on what interventions are taken and how they are implemented; this will be specified in more detail in the budget law. In order to support growth, attention should be focused on measures to foster private and public investment, ensuring for the latter the prompt utilization of resources. Funding should be sourced above all from interventions to limit general government running costs.

The fiscal policy stance is expected to remain expansionary in 2017

In the Update, the Government confirmed its fiscal policy stance for the three years 2017-19 as outlined in April. For 2017 it reiterated its intention to cancel the VAT increases envisaged under the safeguard clauses and to offset the effects of this only in part with measures to counter tax evasion and elusion together with others to reduce spending. The Update lists a number of other expansionary measures such as public investment in infrastructure and tax incentives for investment by firms. The ratio of debt to GDP is expected to begin to fall (by 0.3 percentage points, to 132.5 per cent).

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